Kabul Bank: Where business and political ties bind

For years, Sherkhan Farnood insisted he was doing business the Afghan way. But this week, it was not business as usual at Kabul Bank after its colourful co-founder was ousted as chairman, triggering a wave of panic withdrawals.

Shortly before logging off work before the Friday weekly holiday, Javed Babak, an Afghan freelance journalist, made a resolution.

“On Saturday, I’ll go to the Kabul Bank office and take out my money,” said Babak in a phone interview to FRANCE 24 from the Afghan capital of Kabul. “I didn’t have the time last week. But I’ll go as soon as the banks open on Saturday. I’m going to withdraw my money because I’m worried and I don’t want to lose my money.”

Withdrawing cash is not what the finance doctors are ordering. At a news conference Thursday, Afghan Finance Minister Omar Zakhilwad cautioned accountholders against triggering a run on the bank. “We are requesting people not to rush. We know the money is there, they must not panic. We are sure, a hundred percent, that the bank is safe," said Zakhilwad.

Unfortunately many Afghans are not so sure.

The wave of withdrawals started earlier this week following reports in leading US dailies that two top executives at Kabul Bank, the country’s largest commercial bank, had been ousted due to massive financial irregularities.

The New York Times and The Wall Street Journal quoted an unnamed Afghan official as saying the bank’s losses could exceed $300 million — an amount far greater than the assets it has on hand.

By Thursday, Afghan government officials were roundly denying the US media reports, dismissing them as "baseless information and rumours".

According to Zakhilwad, the two senior Kabul Bank executives resigned in order to comply with new regulations. He also challenged reports that losses at Afghanistan’s largest commercial bank exceeded its assets, maintaining that Kabul Bank has more than $1 billion in deposits.

A tangled web of cronies doing business as unusual

While the official reassurances were primarily designed to prevent a run on the banks – a fate that has so far been averted – many Afghans are wavering over which version to believe.

“The real problem in Afghanistan is that we don’t have a lot of information about what happens behind-the-scenes. What you get from the media is not the official version,” explains Yama Torabi, co-director at the Kabul-based Integrity Watch Afghanistan. “At this stage, there are a lot of questions. The Afghan government must provide access to information.”

Whatever the real reasons for the bank executives’ resignations, certain facts on the ground – and on paper – are alarmingly clear. Since it was founded in 2004, Kabul Bank has not been doing business as usual.

Instead, the country’s largest private financial institution has run on a tangled web of cronyism, with top officials – many of them related to senior Afghan political figures – engaged in overlapping businesses, issuing illegal amounts of credit to a select circle of Afghan elites, and dabbling in dubious financial ventures.

The web of relations is so intricate, The Washington Post provided its readers a helpful chart to track the connections.

Afghanistan’s poker-playing, political kingmaker banker

At the heart of the Kabul Bank morass lies co-founder Sherkhan Farnood, a world-class poker player who has resigned from his post as bank chairman. A colourful personality, Farnood’s business assets include Pamir Airways, which runs domestic as well as international flights to the UAE, India, Saudi Arabia and Tajikistan.

Farnood’s business tentacles stretch to the Shaheen Exchange and the New Ansari Exchange, which are hawala money transfer firms. The 46-year-old math and money whiz has extensive experience in the hawala business, an informal, largely unregulated transfer system.

After the 1979 Soviet invasion of Afghanistan, Farnood set up a hawala exchange in Moscow to transfer funds between Afghanistan and Russia.

Following the fall of the Taliban, Farnood returned to Afghanistan, where he set up Kabul Bank in 2004. According to a Washington Post report published earlier this year, Farnood’s Dubai-registered hawala, Shaheen Exchange, moved in upstairs and started moving cash for bank clients. The bank’s chief audit officer told the daily that Shaheen Exchange had shifted $250 million to $300 million to Dubai.

According to US officials, Kabul Bank has used the hawala to clandestinely transfer almost $1 billion out of Afghanistan in the past few years. US and Afghan intelligence officials believe this unregulated system is being used by Afghan politicians, drug barons and even the Taliban to move billions of dollars out of the country.

The bank’s use of hawala has raised eyebrows among experts. “This is a big surprise,” says Torabi. “I have transferred money through the Kabul Bank so I don’t understand why the bank needs hawala, which is opaque and much less secure. It shows that there might be problems in terms of the source of the money being transferred.”

Brothers in arms at a bank ‘too corrupt to fail’

Kabul Bank’s political connections reach all the way up to the Afghan president and vice president. The bank’s shareholders include Mahmoud Karzai, brother or Afghan President Hamid Karzai, and Hassem Fahim, brother of Afghan Vice President Mohammed Fahim.

Kabul Bank executives helped finance Karzai’s 2009 presidential re-election campaign, with Farnood organizing fundraisers for the Karzai campaign in Dubai, where he is currently based.

Such generosity in Afghanistan does not go unrewarded. In return, the Afghan government channels the pay of Afghan troops and civil servants through Kabul Bank. The extent of the bank’s operations across the country is so vast, US officials fear that trouble at Kabul Bank could trigger a major economic breakdown, which could lead to security havocs in the insurgency-hit nation.

In a blog posting, a senior New Yorker editor caustically wondered if American taxpayers would end up bailing the bank since it’s “too corrupt to fail”.

An economic boom in an impoverished nation

Headlines from Afghanistan over the past few years have featured an endless series of depressing security news. What few international readers comprehend though is the vital economic growth in this war-torn nation over the past nine years.

Although Afghanistan remains an impoverished country, huge infusions of foreign aid have seen the legal economy grow about 15 percent per year. This does not include the parallel economy, where opium accounts for one-third of the country’s total economic activity, according to the World Bank.

Unfortunately, the vast majority of these riches sloshes between Afghanistan’s minority elites, some legitimately, some not.

The “Afghan way of doing business” is so commonplace and unquestioned that in a February interview with a US daily, Farnood brazenly quipped, "What I'm doing is not proper, not exactly what I should do. But this is Afghanistan."

Since the latest scandal broke though, Afghanistan’s poker-playing, political kingmaker banker has been more circumspect. "I've never cheated anyone and have always paid everyone,” he told The Washington Post Thursday.

Going back to the old way of doing business

The problem though is that he tended to pay everyone too lavishly too soon. Mahmoud Karzai, the Afghan president’s brother who owns a seven percent stake in Kabul Bank, has been living in a luxury villa purchased with Kabul Bank money under Farnood’s name in Dubai’s upscale, man-made Palm Jumeirah island.

Following his resignation, Farnood has pledged to hand over to Kabul Bank the titles of prime Dubai real estate purchased with bank money but registered until now in his and his wife’s name. He has estimated that the properties are worth about $160 million.

That’s a little over the amount withdrawn from Kabul Bank by panicking depositors on Thursday. According to Farnood, depositors withdrew $85 million Wednesday and $109 million Thursday.

At a news conference Thursday, President Karzai assured Afghan civil servants that they would not lose their salaries through Kabul Bank. “"We have enough cash to support the bank,” said Karzai. “We have $4.8 billion in cash.”

Financial experts note that the extent of the damage could be contained in the largely rural country where only five percent of Afghans have bank accounts.

But many of those who do have accounts say they are taking no chances and will opt instead for the old way of doing business.

“I don’t have a lot of money in Kabul Bank, most of my money is in Azizi Bank,” explains Babak, referring to another Kabul-based bank founded by Mirwais Azizi, a former Farnood business associate. “But I’ve decided not to deposit my money in any Afghan bank because I’m worried. I think most Afghans will just use hawala now. It’s more simple, there’s no bureaucracy and you don’t have to wait in line. It’s also easier to use them if you need to send money to the provinces. You just give them the cash and your family in the village can collect it.”